Retirement is government, wifes is state teacher, so retirement savings is forced pension.

Extra income monthly after all bills is about $3,000

Plan is to pay a balanced plan as follows:

Extra $1,000 to cash savings (Currently at 50K saved)

Extra $1,000 to mortgage pays off mortgage in less than 10 years and saves over 90k in Interest, currently owe about 207, 000 and worth about 300,000

Pay a little extra to the car loan to just pay it off faster and speed up the payments to 3 instead of 5 years.

So in 3 years I should have the car paid, an extra 36,000 in saving (so about 86k) and about 36,000 extra paid off of the house plus the 15 or so that would also come off from regular fixed payments.

Sound like a good plan? No major purchases coming other than the usual appliances and so on. Kids always cost but with no bills we live fine without touching the extra.

Any other ideas or does that sound pretty solid?

Thu Jan 05, 2017 1:45 am

oldguySenior Member

Cash: $ 736.65

Posts: 3582
Joined: 21 May 2006
Location: arizona

quote: Any other ideas or does that sound pretty solid?

Personally, look at a longer term plan, ie 19 or 20 years and beyond. I would direct that $36,000/yr to wealth-building. Your 3 loans are 'keepers', they are long term, low interest, fixed rate. Pay the minimums.

Invest your $36k/yr in an 11%/yr Index Fund, that's $2,275,000 at age 65. If you also invest your existing $50,000 in that same fund, that will add another $363,000 at age 65, for a total of $2,650,000 at retirement.

At retirement, start using your pensions and transfer the $2.6M from wealth-building to a wealth-preservation fund.

As for the car loan - never prepay a 0% loan, instead retain the use of that money, put it to work for you elsewhere. Coincidentally, we just got a new 2017 car, $38,000, 5 yr loan, I'll keep the loan full term and leave my own money in our 11%/yr account.

Thu Jan 05, 2017 5:04 am

outsicktodayNew Member

Cash: $ 1.25

Posts: 6
Joined: 05 Jan 2017
Location: California

Awful, but I have no idea what an index fund is. Ive just been living by the rule of no debt and used thst to psy off all student loans and credit cards. Investing isnt anything I was ever schooled in. Googling index fund after this reply.

Thu Jan 05, 2017 6:12 am

oldguySenior Member

Cash: $ 736.65

Posts: 3582
Joined: 21 May 2006
Location: arizona

quote: Investing isnt anything I was ever schooled in.

Isn't that the truth? - I probably didn't have any ideas about stocks/bonds until after I finished college, that's probably true for most of us (unless our major was business).

Here is a site for the S&P 500 Index, the 500 corporation in that Index contains about 80% of the capital in the US.

The history goes back to 1871. Check a few 30-year blocks of time, the usual answer is 11%/yr.

Here is a comparison -
1. Save $5000/year at 0% for 30 years equals $150,000.
2. Or, Invest $5000/year at 11% for 30 years equals $1,150,000.
For most families, $5000/yr is a reasonable input - and $1,150,000 is good goal for many families. Surprisingly, few people take that route - and few people become millionaires.

If you're interested, there is a good book that summarizes Indexing. Written by John Bogel, the inventor of Index Funds, he is the founder of the Vanguard Fund company - The Book of Common Sense Investing - about $15 on Amazon.

Thu Jan 05, 2017 3:56 pm

outsicktodayNew Member

Cash: $ 1.25

Posts: 6
Joined: 05 Jan 2017
Location: California

Funny, I checked and Vanguard is the type of fund that my retirement pension is invested in, the one that I have to contribute X amount to in order to received X amount based on total years of service completed. So that may be why I can get the pension I can, it's already invested in these types of index funds. Going to look deeper into it, but yes its Vanguard.

I looked at my Voya account and this fund is available for investment, an index fund and it does return quite a crapload of money compared to the return I am getting now (money sitting gives me less than 1%).

I am getting the safe versus risk concept now, I can sit on the money and do nothing, and add to it, pay off loans that are low interest (mortgage at 5% is guaranteed return) and take very little risk and not make very much, or invest the money in an index fund and potentially make 11% (double the return).

If I add 1G to my house principal I save 90g over the course of the loan and pay it off in under 10 years. That same money invested would be 12x10 or 120,000 paid to an index fund, and if it makes even 8% after I have 100G in that account then I gain 8G a year after 10 years or 10 more at 80G, but with a higher risk.

Honestly I really hate the risk, but I would also save yearly 12K off my tax bill. Money comes out of check pretax.

Sat Jan 07, 2017 9:11 pm

oldguySenior Member

Cash: $ 736.65

Posts: 3582
Joined: 21 May 2006
Location: arizona

quote: mortgage at 5% is guaranteed return

Exactly - and non-math folks think - Wow, a guaranteed 5% is great. But that's the wrong comparison, a guaranteed 5% is also bad (compared to 11%).

The Law of investing - "Risk and return are directly proportional". To build wealth you must take enough risk to out -pace inflation, otherwise the purchasing power of your account cannot grow, in fact 1%, your account loses purchasing power ("safe" has a cost, too).

As for minimizing mortgage interest - bad idea, yet many folks never calculate it.
Eg, I often refi a a rental house, and take out $50,000 of equity. I invest it in the SP500 where it grows to $1,100,000 in 30 yrs. That $50k added to my loan costs about $270/m ($47,000 in interest). And I'm happy to pay it - I'm focused on using the $50,000 to earn $1,100,000, I'm not trying to minimize my interest costs.

Sat Jan 07, 2017 11:03 pm

outsicktodayNew Member

Cash: $ 1.25

Posts: 6
Joined: 05 Jan 2017
Location: California

I think some people are wired to take less risk, I am sort of in that camp. Especially with kids etc.

On Paper I really like the idea of putting money to work for larger returns, but in the end I think I tend to stay away from extremes.

I will never be rich, but I also will never be poor (again) either.

I think what I will end up doing is saving 1/3 of all excess income, paying 1/3 toward the house to guarantee a rate of return at 5% , and paying 1/3 toward the car loan (which I know has no return other than a quicker freeing up of monthly income).

After 3 years I will owe about 150,000 on the house, have no car payment or any other debt, and have about 80-90k saved up.

My job allows me still to get a retirement at 100% of my income if I work to 63 or so and I will likely have the house paid off maybe 10 years sooner than that. So for me the retirement goal of zero debt, no house payment etc. With a nice savings is fine.

With the Donald in there now for 4 years, I think I will be happy if we're not in a world war and I have a job with food to eat.

Mon Jan 09, 2017 12:18 am

oldguySenior Member

Cash: $ 736.65

Posts: 3582
Joined: 21 May 2006
Location: arizona

quote: I think some people are wired to take less risk, I am sort of in that camp. Especially with kids etc.
On Paper I really like the idea of putting money to work for larger returns, but in the end I think I tend to stay away from extremes.
I will never be rich, but I also will never be poor (again) either.

You sound pretty normal.
Risk is not just high/low. it's all things between. Some of are more comfortable with risk, some are more averse. But it's mostly related to age - as you age you need more safety to protect what you have. And you have less time to rebuild a loss.
Planners tell folks to avoid risk. And that leads to the 'never rich, never poor' outcome for most Americans. There is a preponderance of Boomers who continually try to "beat" the market (no patience). They try to buy the next home run - and almost always crash. In/Out, Buy/sell. High risk, hoping for a quick 20% or more. But getting rich is not exciting - you buy boring stuff, accumulate it, never sell. And after 20 or 30 yrs you're a millionaire. I'm surprised that more people don't do it - during the 1970s, 80s, 90, 00s, Americans had good steady medium paying jobs - you would think that most families could invest $5000/yr into a SP500 fund - but they don't?

I manage risk by investing in a bond fond and an SP500 Index Fund. I adjust the mix to get the risk that I want. The SP500 is moderate risk, it averages 11%/yr. The bond fund averages 5% (3% coupon 2% growth).
So when my mix is 100%/0%, my risk/return is 11%/y. When my mix is set at 0%/100%, my risk/return is 5%/yr. At 50/50, my risk/return is the average of 11% and 5%, ie 8%. As my age changes, my retirement status, etc, I adjust my mix to get the risk/return that I want.
When 401ks were invented (about 1982) I maxed it, it got to a million in about 17 years. I retired 18 yrs ago, stopped adding to the 401k. But the fund has more than doubled since retirement (The Rule of 72).

Mon Jan 09, 2017 4:19 pm

outsicktodayNew Member

Cash: $ 1.25

Posts: 6
Joined: 05 Jan 2017
Location: California

Have you explored loanclub.com ? looks like a fairly safe way to make 5%

But then when I thought about it, with my mortgage I can make a guaranteed 5% on whatever I put into it extra. Its a 30 year fixed at 5%.

I ran the numbers and if I put in 1G extra a month I save 2 payments off the loan and I save 2,600 in interest, plus I have 1G extra in equity.

If do that until the loan is paid, I can save about 90K, and pay the loan off 13 years quicker (a little less than 10 instead of 23).

I think I might be playing it a little too safe, but compared to what I am seeing as normal maybe not. I keep seeing people repeatedly refinancing a 30 year fixed and never paying off anything, running up huge credit card debts, etc. Personal debt appears to be a trouble spot again from what I am seeing and I don't hear a lot of people putting extra money into their home loans. On this forum it might be different, but then again I don't think many of us on here are exactly normal since we spend time on a money and investment website.

My thoughts on loanclub is that it will reflect what the market does, if we hit turbulance the first thing people do is stop paying on loans so it looks volatile. Then again, the safe A paper FICO score loans of 800 plus return 5%, the G rated loans can pay 30!!

So again, risk versus reward. I think where I fall is on the pay the mortgage down and take the guaranteed 5%.

I will likely be mid 50's with no debt at all, including no mortgage, that will be when I will need to do some property buying and serious planning for last 10 years of work. Also I will have 2 kids ready for college and I know people like to save and overpay for that, but I went 2 years of CC, 2 years of state college and 2 years private and did just fine. I had two that grew up and decided they wanted to do nothing so that would have been wasted, now I have 2 more and who knows what they will end up doing but nothing stops people from pursing whatever they want. I paid my student loans so the last thing I want to hear is free college etc.